Our contractor is excited. A big time government authority awarded her a multi-million dollar contract. But all she can think about is the money she will make—the economics—cutting costs, maximizing profit, efficiency, speed, quality and safety.
She knows that something could go wrong that will derail performance and eat her profits. She knows that bad circumstances outside of her control on this project might create a disaster that will put her company and perhaps even her into bankruptcy. That is a risk she’s willing to take. It’s a risk that all successful contractors are willing to take.
What our contractor doesn’t know, however, is how to use the law—particularly the provisions, terms and conditions of the contract—to limit that risk. And that is what we’re talking about here today. Contractors can use the written language of their contracts to protect themselves against all kinds of common disasters, crises and pitfalls that befall them from time to time.
We’re going to show you provisions that contractors sometimes use to shield themselves from claims and lawsuits and from getting impaled on additional costs and liabilities when things go bad.
The first thing to consider is a liability cap, sometimes referred to in a contract as a “limitation of liability.”
A typical provision may be drafted as follows:
“In no event shall the maximum aggregate liability of Contractor in respect of all claims arising out of or in connection with this Agreement or otherwise exceed [stated percentage] of the Contract Price regardless of whether any such liability may be based on contract, guarantee, indemnity, warranty, tort, including negligence or gross negligence, strict liability, or otherwise.”
“The maximum aggregate liability of each Party (other than the payment by Owner of the Contract Price) in respect of all claims arising out of or in connection with this Agreement, whether based in contract (including breach, warranty or indemnity) or tort (including fault, negligence or strict liability), or otherwise shall not exceed [stated percentage] of the Contract Price.”
Provisions like this should be in BOLD typeface, so that the other party can’t say weren’t aware of it. Of course if you sign a contract courts will presume you have read it. But if you’ve been involved in litigation before, you know that every little bit helps when you’re trying to enforce the terms of a contract.
Similar provisions limiting liability for consequential, incidental, punitive or special damages could also be used to make sure the downside is bottomless if something goes terribly wrong.
Why is contract language like this important? Because the other parties involved, the owners, the engineers, other contractors, are trying all the time to shift the risk of loss to you. Lenders want contractors, not the owner, to assume much of the risk of the project. Taking on some risk is what contracting is all about. But smart contractors make sure that they are assuming only those risks that are appropriate under the circumstances.
So let’s talk a little more about the liability cap. What should the amount of the cap be? It could be as high as the contract price, but try to negotiate for a lower one. Contractors usually do. Getting cap anywhere between 30 to 50% of the contract price is a win. Here are some things to take into consideration when negotiating a liability cap. How risky is the project? Is this an unusual project involving untested or new technology or means and methods developed specifically for this work? If so, you should be less willing to put the whole contract price at risk. Did you draft the plans and specifications? Or did the owner and his architects and engineers or some other third party. If you didn’t, if you’re relying on someone else’s design, then the risk of running into an unforeseen problem is greater, and you should try to get a cap that puts less than the whole contract price on the line. Consider the size of project in negotiating the cap as well. On big jobs, with many contractors and component parts, it’s unlikely that your default will damage the owner in amounts equal to your contract price. Do you have a great history of prior performance? Use that to get a more protective cap. Is your company one of only a few that can perform this kind of contract? Use that to get a bigger cap on your ultimate liabilities.
Can’t wait to send you Step 2 of this valuable article, valuable because the old adage is true: an ounce of prevention is worth a pound of cure.